Wednesday, March 24, 2010

Adobe (ADBE) Illustrates Tech Spending Revival

Adobe (ADBE) held its first quarter fiscal 2010 analyst conference yesterday and reported generally good numbers. Revenue was $858.7 million, up 13% sequentially from $757.3 million and up 9% from $786.4 million in the year-earlier quarter. Earnings per share (EPS) were $0.24, up sequentially from negative $0.06, but down 20% from $0.30 year-earlier. (See my Adobe Q1 2010 conference summary)

Note that the quarter reported ended March 5, 2010. So the period mostly overlaps with what most companies would call their first quarter ending March 31, 2010. So it is an early indicator for software, and probably hardware, trends in the quarter.

I don't own Adobe stock, nor do I think it is undervalued compared to other tech stocks. But I do think that revenues and profits will accelerate this year.

Creative Suite 5 (CS5), the upgrade from CS4, will be released later this year. CS4 has been a disappointment, and that is mainly due to the recession and the Windows operating system cycle. CS4 corresponded to Windows Vista; CS5 will take advantage of Windows 7.

Can we admit now that much of the depth of the recession in the last quarter of 2008 and first quarter of 2009 was a business panick? Businesses cut their purchasing to the bone, some times well into the bone, because of economic uncertainty from the banking/financial sector failures, which in turn had been triggered by the housing downturn. But except for housing and finance, by and large the technology businesses were healthy. Many had large pools of cash to draw on, and were never in any danger of going under. By firing employees and cutting their own spending they made the economy worse, in particular within the tech sector, where they do a lot of buying each other's products.

In Adobe's case lots of people, freelancers and corporate drones alike, decided they could make do with CS3 rather than upgrading to CS4. Also, CS4 did not run so great on Windows XP. Remember when XP was introduced and their was the usual anti-Microsoft campaign and people were slow to adopt it? Then, once they learned XP and got used to it, they could not live without it and did not want to learn a new operating system. The same might have been true of Vista. I use Vista and it was a major improvement on XP. But between the usual timidity and the recession, a lot of people, including large enterprises, skipped Vista. Delaying taking advantage of its higher productivity over XP. Of course, Vista consumed more resources (faster processors, more memory), so by sticking with XP people were also able to avoid hardware upgrades.

2010 looks like it is shaping up to be one big refresh cycle. Old desktops can be replaced by supercomputers or even notebooks at $500 per pop. Windows 7 has gained people's confidence and really shines on newer hardware. And CS5 is going to have many new features that will increase productivity among creative professionals. As the guys at Adobe said, Create Suite lets you create once, then easily export the content to print, large screen Web format, mobile format, or even high-definition video. And it won't work well with a pokey old single-core computer running XP.

I am predicting a great year for AMD, Intel, NVIDIA, Adobe, and Microsoft. Most other innovative tech companies, both hardware and software, should do well to the extent they are competitive within their specialties. Right now the tech companies I actually own are Marvell, AMD, Dot Hill, Microchip, TTMI, SGI, and Applied Materials. Typically the first quarter of a year is seasonally down for tech companies, but I expect it to be less seasonally down than usual, followed by ramping through the year.

Later today Linux specialist Red Hat will report results for its quarter ending February 28. At I'll be posting my Red Hat (RHT) analyst conference summary soon after the conference ends. And probably my column hear tomorrow will give some additional insight into Red Hat.

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